First time investors: Basic investment insights for real and sustainable returns

The most important investment lesson is that investing is more about developing an investment strategy based on a sound investment philosophy than it is about predicting next year’s winners. In fact, it is virtually impossible to predict with any degree of certainty, which asset classes are going to outperform in the short-term.

We do know that of the four major asset classes (equities, bonds, property and cash), the after-tax performance of equities will probably be greater than that of bonds, property and cash over the long-term. We also know that equities are likely to experience a greater level of volatility in the short-term than cash. On the other hand, we do not know which asset class will deliver the best return at any given time and whether the Rand will strengthen or weaken in relation to other currencies.

Developing a robust investment strategy based on established investment principles simplifies what would otherwise be a difficult process. Following this approach removes the need for investors to make decisions in an atmosphere of uncertainty and prevents them from focusing exclusively on current experience and historic performance, which are inaccurate predictors of future performance and experience. It can be argued that having a well-formulated and appropriate investment strategy is just as important as return that the investment delivers. This is because the investment strategy provides a realistic basis for the investment to be incorporated into the investor’s broader financial plan.

It is important for investors to separate the strategy from the outcome or return. While returns may vary greatly even in circumstances where there has been prudent and expert planning, the investment strategy acts as a framework through which to determine an appropriate overall asset allocation from which a realistic level of predictability can be established in respect of likely investment returns.

An investment strategy that takes into consideration the investment objective, time horizon and risk tolerance will lead to a recommended strategic asset allocation for the investment. This strategic asset allocation will be based on the unique circumstances of the investor and will provide a framework to develop an expected return for the investment. The objective is to design and implement a strategy that offers the best possible return for the level of risk that the investor can tolerate.

When considering the investment objective, relevant factors include:

Is the investment required to provide an income immediately or is it simply intended to provide capital growth?

What is the investment time horizon? In other words, how long does an investor intend dislocating from the investment without drawing income or capital?

What are the investor’s personal preferences, if any?

Is it intended for the investment to be focused on one asset class or to be spread across several asset classes?

What does the investor require in terms of international diversification?

Asset allocation is the process of spreading your capital across different types of asset classes and is widely considered one of the most important elements of the investment planning process. An investor’s investment objective and risk tolerance will ultimately lead to a recommended asset allocation. Risk tolerance is determined by subjective and objective factors. The subjective factors are referred to as an investor’s risk appetite or willingness to take risk, and the objective factors as the investor’s risk capacity. For example, it is possible that a person who is naturally more willing to take risk may not have the capacity to take high levels of risk due to factors such as a definite or contingent requirement to consume all or a part of the investment for other purposes.

A relentless focus on strategy accompanied by the disciplined implementation thereof is the only rational route to success. A professional financial planner is able to play a vital role in ensuring that you understand and stick to your investment strategies.

It is important to consult a properly qualified financial planner to assist with the preparation of a robust investment strategy resulting in a recommended strategic asset allocation. Investment performance expectations should be based on the returns that the particular asset allocation is likely to deliver and the investment must measure the performance of the investment in terms of this. The investment must be managed in a disciplined manner according to the strategy in order to ensure success.

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